Venture Capital/Analysis/ What Q3 data says about European tech’s fortunes in 2022 Sifted analysed Q3 for the bigger picture on the state of play in European tech By Federico Scolari 17 October 2022 \Venture Capital Hoxton Ventures to add a new partner in April By Amy Lewin 17 February 2023 Venture Capital/Analysis/ What Q3 data says about European tech’s fortunes in 2022 Sifted analysed Q3 for the bigger picture on the state of play in European tech By Federico Scolari 17 October 2022 2022 has been a mixed bag for European tech so far. Between talks of a downturn, slashed valuations, layoffs and a generally poor macro environment, VC funding has taken a hit downwards from 2021’s hypergrowth. But it’s not all bad news. VCs have continued to raise significant cash this year — EQT Growth’s €2.4bn fund and Cathay Innovation’s €1bn money pot, for example — and some countries on the continent have shown promising signs of growth. Here’s the state of play after Q3. Between a slow September and a sleepy August August is known across Europe as a dull month — OOO messages flood founders’ inboxes and planned deals are put off for later in the summer. But this year the European VC pullback has not stopped there. At $18.5bn, aggregate Q3 investment has significantly plunged below previous quarters, although it still sits higher than pre-2021 levels. Much is to blame on a slower than usual September — recovery has proven moderate, as the month failed to adjust to the upward path seen in recent years. Not only that, but September funding was also lower than July’s for the first time in four years — about a third down, and around 43% the levels of September 2021. UK turmoil, Franco-German volatility and the Italian sprint Q3 has reshuffled some of the more traditional funding patterns across Europe, as mature ecosystems saw more of a slowdown, while smaller ecosystems attracted healthy amounts of funding. While still Europe’s largest tech hub, the UK suffered a 60% quarter-on-quarter decline in VC funding, ending up at only a third of what it was the same period last year. Around 500 deals were closed over the summer — the fewest for a single quarter in eight years. Only eight of those surpassed the $100m tag, against 27 in Q3 2021. Shockingly, there were as many UK megarounds back then as for the whole of Europe in Q3 this year. As a consequence, competition for Europe’s top funding destination has never been tighter. The closest gap between first and second ($900m) was recorded in Q3 2019, when Germany leapfrogged its way into second place with rounds for N26, BioNTech and Flix SE. The troubling catch: top dogs France and Germany are slowing down too. After peaking in Q1, French VC funding fell to a 15-month low in Q3 ($2.5bn). But the traction that minted unicorns Qonto, Exotec, Ankorstore, PayFit and Spendesk earlier this year has not yet run out, as the country still stands well above pre-2021 trendlines. At $2.6bn, Germany followed a smoother quarterly decline — around 33% — though it had not yet caught up with total funding being funnelled into France over the year. Elsewhere, some countries are warming up to the prospect of unprecedented growth. The hot Mediterranean summer has given Italy its all-time record quarter — at $840m, it’s more than the entire amount poured in 2020 alone. Some rare megarounds sent ripples across Europe, including a whopping €320m Series D for payments unicorn Satispay, Casavo’s €100m Series D and Bending Spoon’s $340m raise (of which 88% was debt). Sweden also quietly emerged as one of the most active ecosystems in Q3, bringing in $2.6bn — a 100% quarter-on-quarter increase. Other than Northvolt and Klarna, H2 Green Steel and Kry grabbed a €190m Series B and a $160m Series D respectively. On similar positive trajectories, Spain gathered some $750m in fresh funding, keeping up with the trends it set in Q2 2022, while Ireland outpaced its previous quarter by a $40m margin. Mammoths are going extinct (again) Notwithstanding comparatively smaller cheques, some startups have snatched raises that would have turned heads even at the peak of 2021. Case in point: Klarna’s $800m raise — though it was closed at 15% it’s prior valuation. Sweden-based battery developer Northvolt grabbed a $1.1bn convertible note from the likes of Baillie Gifford, Goldman Sachs and Volkswagen, bringing its total funding to around $8bn. Unicorns Celonis and Contentsquare each pulled in equity and debt rounds at $1bn (40-60 split respectively) and $600m (67-33 split), followed by insurtech startup wefox’s $400m Series D. But the data paints a clear picture: megarounds are a falling trend. Only 27 $100m+ deals were struck in Q3 — the fewest since Q3 2020, and a 60% quarter-on-quarter fall. Sifted tracked around 2,000 transactions for Q3. The average (disclosed) deal size was €11.2m, indicative of a focus shift towards earlier stage deals. Not only were deals smaller, they were also rarer — this is the lowest number since 2015, allowing for some reporting lag. Sectors In line with previous quarters, fintechs and healthtechs snatched the most deals across Q3 (around 500 between the two). But energy startups signed the richest term sheets with an average deal size of $32m, in a crucial effort related to recent geopolitical concerns. Amongst these, UK-based Octopus Energy raised $225m, followed by Connected Kerb (£110m) and Lightyear ($90m). Dry powder and money on the move If funding rounds have decreased in both size and number, available funds are walking up the opposite path, as European investors are hard at work onboarding their LPs. With 132 raises, the birth rate for new funds in Q3 (44 a month) has exceeded the annual average of 38 a month for 2022. Some monstrous extensions have taken place in Q3, including EQT Growth’s €2.4bn fund, Northzone’s €1bn fund, XAnge’s €220m raise and Point 9’s €180m early-stage money pot. While slowing, VC (unsurprisingly) remains one of the main funding routes for European startups. So who signed the most cheques in Q3? The European Innovation Council (EIC) — the EU’s startup investment programme — participated in more than 40 deals (averaging $10m in overall size), followed by Bpifrance (28 deals), Speedinvest (15), Kima Ventures (15) and High-Tech Gründerfonds (14). US VC giant Sequoia Capital was also involved in 14 deals in Q3 — including startups Ledgy, Baselime and CreatorSpace — at a $60m deal size average. Creandum, Cherry Ventures, LocalGlobe, Antler and Index Ventures all signed off on at least 10 rounds over the quarter. Lost in currency exchange With euro-dollar parity and the pound’s volatility, many are expecting non-European funds to scan for (relatively) cheaper opportunities and lower valuations. Between Q2 and Q3, the share of European and domestic investment has shyly dropped by 2 percentage points (from 58% to 56%) — insufficient to indicate a significant move from international investors, but enough to spark interest going into the new quarter. *note: though most deals are captured, recording lag makes for systematic underreporting of recent figures. Q3 data will adjust upwards as smaller deals are added in. Federico Scolari is a junior intelligence analyst at Sifted. 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